Tag Archives: national debt

Last JuneZH reportedthat according to the Institute of International Finance – perhaps best known for its periodic and concerning reports summarizing global leverage statistics – as of the end of 2016, in a period of so-called “coordinated growth”, global debt hit a new all time high of $217 trillion, over 327% of global GDP, and up $50 trillion over the past decade.

Six months later, on January 4, 2018, theIIF released another global debt analysis, which disclosedthat global debt rose to a record $233 trillion at the end of Q3 of 2017 between $63Tn in government, $58Tn in financial, $68TN in non-financial and $44Tn in household sectors, a total increase of $16 trillion increase in just 9 months.

Now, according to itslatest quarterly update, the IIF has calculated that global debt rose another $4 trillion in the past quarter, to a record $237 trillion in the fourth quarter of 2017, and more than $70 trillion higher from a decade earlier, and up roughly $20 trillion in 2017 alone.

The IIF report, which also sources data from the IMF and BIS, found that the share of global debt remains well above 300% of global GDP, with mature market, i.e., DM, debt/GDP now at 382%. The silver lining: that number was slightly below recent levels, as increasing GDP growth in DMs helped reduce the debt-to-GDP ratio. However, this was more than offset by a surge in debt in emerging markets, where total debt/GDP is now well above 200%.

The good news, if only temporarily, is that on a consolidated basis, global debt/GDP fell for the fifth consecutive quarter as global growth accelerated: the ratio is now around 317.8%, or 4% points below the all time high hit in Q43 2016. To be sure, even a modest slowdown in GDP growth, let alone a contraction, will promptly send the ratio surging to new all time highs.

So what was the culprit for this unprecedented debt surge? Central banks of course.

“Still-low global rates continue to support unprecedented levels of debt accumulation,” officials from the IIF said in a release.

As the report also notes, among mature markets, household debt as a percentage of GDP hit all-time highs in Belgium, Canada, France, Luxembourg, Norway, Sweden and Switzerland, which – as Bloomberg correctly notes – That’s a worrying signal, with interest rates beginning to rise globally. Ireland and Italy are the only major countries where household debt as a percentage of GDP is below 50 percent.

IIF representatives also highlighted the weaker U.S. dollar as having “masked longer-term concerns about debt sustainability, particularly in emerging markets.” The reduction in debt to GDP came mainly from developed markets, such as the United States and Western Europe, but was an overall trend with 36 of the 49 countries in the survey’s sample recording a drop in debt-to-GDP.

Among emerging markets, household debt to GDP is approaching parity in South Korea at 94.6 percent.

Finally, the report also found that U.S. government debt is now 99% of GDP as a sector. With the United States expected to record a $1 trillion budget deficit by 2020, according to the latest just released CBO forecast, the US should cross 100% debt/GDP in the next few months…

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For 8 years, we took every opportunity to point out that under Barack Obama’s administration, US debt was rising at a alarmingly rapid rate,having nearly doubled, surging by $9.3 trillion during Obama’s 8 years. It now appears that the trajectory of US debt under the Trump administration will be no different, and in fact based on Trump’s ambitious fiscal spending visions, may rise even faster than it did under Obama.

We note this because as of close of Friday, theUS Treasury reportedthat total US debt has risen above $21 trillion for the first time; or $21,031,067,004,766.25 to be precise.

Putting this in context, total US debt has now risen by over $1 trillion in Trump’s first year… and the real spending hasn’t even begun yet.

What is amusing is that Trump – who has a tweet for every occasion – and who no longer even pretends to care about the unsustainability of US spending was extremely proud as recently as a year ago by how little debt has increased during his term.

The media has not reported that the National Debt in my first month went down by $12 billion vs a $200 billion increase in Obama first mo.

We doubt today’s milestone will be celebrated on Trump’s twitter account.

And while some can argue – especially adherents of the socialist Magic Money Tree, or MMT, theory – that there is no reason why the exponential debt increase can’t continue indefinitely…

… one can counter with the followingchart from Goldman, which shows that if one assumes a blended interest rate of roughly 3.5% as the Fed does, and keeps America’s debt/GDP ratio constant, in a few years the US will be in what Goldman dubbed “uncharted territory” and warned that “the continued growth of public debt raises eventual sustainability questions if left unchecked.”

The bad news, however, is that debt/GDP will not be constant, as the CBO recently forecast in what was actually an overly optimistic prediction.

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I hope this article brings forward important questions about the Federal Reserves role in the US as it attempts to begin a broader dialogue about the financial and economic impacts of allowing the Federal Reserve to direct America’s economy. At the heart of this discussion is how the Federal Reserve always was, or perhaps morphed, into a state level predatory lender providing the means for a nation to eventually bankrupt itself.

Against the adamant wishes of the Constitution’s framers, in 1913 the Federal Reserve System was Congressionally created. According to the Fed’s website, “it was created to provide the nation with a safer, more flexible, and more stable monetary and financial system.” Although parts of the Federal Reserve System share some characteristics with private-sector entities, the Federal Reserve was supposedly established to serve the public interest.

A quick overview; monetary policy is the Federal Reserve’s actions, as a central bank, to achieve three goals specified by Congress: maximum employment, stable prices, and moderate long-term interest rates in the United States. The Federal Reserve conducts the nation’s monetary policy by managing the level of short-term interest rates and influencing the availability and cost of credit in the economy. Monetary policy directly affects interest rates; it indirectly affects stock prices, wealth, and currency exchange rates. Through these channels, monetary policy influences spending, investment, production, employment, and inflation in the United States.

I suggest what truly happened in 1913 was that Congress willingly abdicated a portion of its responsibilities, and through the Federal Reserve, began a process that would undermine the functioning American democracy. “How”, you ask? The Fed, believing the free-market to be “imperfect” (aka; wrong) believed it (the Fed) should control and set interest rates, determine full employment, determine asset prices; not the “free market”. And here’s what happened:

From 1913 to 1971, an increase of $400 billion in federal debt cost $35 billion in additional annual interest payments.

From 1971 to 1981, an increase of $600 billion in federal debt cost $108 billion in additional annual interest payments.

Stop and read through those bullet points again…and then one more time. In case that hasn’t sunk in, check the chart below…

What was the economic impact of the Federal Reserve encouraging all that debt? The yellow line in the chart below shows the annual net impact of economic growth (in growing part, spurred by the spending of that new debt)…gauged by GDP (blue columns) minus the annual rise in federal government debt (red columns). When viewing the chart, the problem should be fairly apparent. GDP, subtracting the annual federal debt fueled spending, shows the US economy is collapsing except for counting the massive debt spending as “economic growth”.

Same as above, but a close-up from 1981 to present. Not pretty.

Consider since 1981, the Federal Reserve set FFR % (Federal Funds rate %) is down 94% and the associated impacts on the 10yr Treasury (down 82%) and the 30yr Mortgage rate (down 77%). Four decades of cheapening the cost of servicing debt has incentivized and promoted ever greater use of debt.

Again, according to the Fed’s website, “it was created to provide the nation with a safer, more flexible, and more stable monetary and financial system.” However, the chart below shows the Federal Reserve policies’ impact on the 10yr Treasury, stocks (Wilshire 5000 representing all publicly traded US stocks), and housing to be anything but “safer” or “stable”.

Previously, I have made it clear the asset appreciation the Fed is providing is helping a select few, at the expense of the many,HERE.

But a functioning democratic republic is premised on a simple agreement that We (the people) will freely choose our leaders who will (among other things) compromise on how taxation is to be levied, how much tax is to be collected, and how that taxation is to be spent. The intervention of the Federal Reserve into that equation, controlling interest rates, outright purchasing assets, and plainly goosing asset prices has introduced a cancer into the nation which has now metastasized.

In time, Congress (& the electorate) would realize they no longer had to compromise between infinite wants and finite means. The Federal Reserve’s nearly four decades of interest rate reductions and a decade of asset purchases motivated the election of candidates promising ever greater government absent the higher taxation to pay for it. Surging asset prices created fast rising tax revenue. Those espousing “fiscal conservatism” or living within our means (among R’s and/or D’s) were simply unelectable.

This Congressionally created mess has culminated in the accumulation of national debt beyond our means to ever repay. As the chart below highlights, the Federal Reserve set interest rate (Fed. Funds Rate=blue line) peaked in 1981 and was continually reduced until it reached zero in 2009. The impact of lower interest rates to promote ever greater national debt creation was stupendous, rising from under $1 trillion in 1981 to nearing $21 trillion presently. However, thanks to the seemingly perpetually lower Federal Reserve provided rates, America’s interest rate continually declined inversely to America’s credit worthiness or ability to repay the debt.

The impact of the declining rates meant America would not be burdened with significantly rising interest payments or the much feared bond “Armageddon” (chart below). All the upside of spending now, with none of the downside of ever paying it back, or even simply paying more in interest. Politicians were able to tell their constituencies they could have it all…and anyone suggesting otherwise was plainly not in contention. Federal debt soared and soared but interest payable in dollars on that debt only gently nudged upward.

In 1971, the US paid $36 billion in interest on $400 billion in federal debt…a 9% APR.

In 1981, the US paid $142 billion on just under $1 trillion in debt…a 14% APR.

In 1997, the US paid $368 billion on $5.4 trillion in debt or 7% APR…and despite debt nearly doubling by 2007, annual interest payments in ’07 were $30 billion less than a decade earlier.

By 2017, the US will pay out about $500 billion on nearly $21 trillion in debt…just a 2% APR.

The Federal Reserve began cutting its benchmark interest rates in 1981 from peak rates. Few understood that the Fed would cut rates continually over the next three decades. But by 2008, lower rates were not enough. The Federal Reserve determined to conjure money into existence and purchase $4.5 trillion in mid and long duration assets. Previous to this, the Fed has essentially held zero assets beyond short duration assets in it’s role to effect monetary policy. The change to hold longer duration assets was a new and different self appointed mandate to maintain and increase asset prices.

But why the declining interest rates and asset purchases in the first place?

The Federal Reserve interest rates have very simply primarily followed the population cycle and only secondarily the business cycle. What the chart below highlights is annual 25-54yr/old population growth (blue columns) versus annual change in 25-54yr/old employees (black line), set against the Federal Funds Rate (yellow line). The FFR has followed the core 25-54yr/old population growth…and the rising, then decelerating, now declining demand that that represented means lower or negative rates are likely just on the horizon (despite the Fed’s current messaging to the contrary).

Below, a close-up of the above chart from 2000 to present.

Running out of employees??? Each time the 25-54yr/old population segment has exceeded 80% employment, economic dislocation has been dead ahead. We have just exceeded 78% but given the declining 25-54yr/old population versus rising employment…and the US is likely to again exceed 80% in 2018.

Given the FFR follows population growth, consider that the even broader 20-65yr/old population will essentially see population growth grind to a halt over the next two decades. This is no prediction or estimate, this population has already been born and the only variable is the level of immigration…which is falling fast due to declining illegal immigration meaning the lower Census estimate is more likely than the middle estimate.

So where will America’s population growth take place? The 65+yr/old population is set to surge.

But population growth will be shifting to the most elderly of the elderly…the 75+yr/old population. I outlined the problems with this previouslyHERE.

Back to the Federal Reserve, consider the impact on debt creation prior and post the creation of the Federal Reserve:

1790-1913: Debt to GDP Averaged 14%

1913-2017: Debt to GDP Averaged 53%

1913-1981: 46% Average

1981-2000: 52% Average

2000-2017: 79% Average

As the chart below highlights, since the creation of the Federal Reserve the growth of debt (relative to growth of economic activity) has gone to levels never dreamed of by the founding fathers. In particular, the systemic surges in debt since 1981 are unlike anything ever seen prior in American history. Although the peak of debt to GDP seen in WWII may have been higher (changes in GDP calculations mean current GDP levels are likely significantly overstating economic activity), the duration and reliance upon debt was entirely tied to the war. Upon the end of the war, the economy did not rely on debt for further growth and total debt fell.

Any suggestion that the current situation is like any America has seen previously is simply ludicrous. Consider that during WWII, debt was used to fight a war and initiate a global rebuild via the Marshall Plan…but by 1948, total federal debt had already been paid down by $19 billion or a seven percent reduction…and total debt would not exceed the 1946 high water mark again until 1957. During that ’46 to ’57 stretch, the economy would boom with zero federal debt growth.

1941…Fed debt = $58 b (Debt to GDP = 44%)

1946…Fed debt = $271 b (Debt to GDP = 119%)

1948…Fed debt = $252 b <$19b> (Debt to GDP = 92%)

1957…Fed debt = $272 b (Debt to GDP = 57%)

If the current crisis ended in 2011 (recession ended by 2010, by July of 2011 stock markets had recovered their losses), then the use of debt as a temporary stimulus should have ended?!? Instead, debt and debt to GDP are still rising.

2007…Federal debt = $8.9 T (Debt to GDP = 62%)

2011…Federal debt = $13.5 T (Debt to GDP = 95%)

2017…Federal Debt = $20.5 T (Debt to GDP = 105%)

July of 2011 was the great debt ceiling debate when America determined once and for all, that the federal debt was not actually debt. America had no intention to ever repay it. It was simply monetization and since the Federal Reserve was maintaining ZIRP, and all oil importers were forced to buy their oil using US dollars thanks to the Petrodollar agreement…what could go wrong?

But who would continue to buy US debt if the US was addicted to monetization in order to pay its bills? Apparently, not foreigners. If we look at foreign Treasury buying, some very notable changes are apparent beginning in July of 2011:

The BRICS (Brazil, Russia, India, China, S. Africa…represented in red in the chart below) ceased net accumulating US debt as of July 2011.

Simultaneous to the BRICS cessation, the BLICS (Belgium, Luxembourg, Ireland, Cayman Island, Switzerland…represented in black in the chart below) stepped in to maintain the bid.

Since QE ended in late 2014, foreigners have followed the Federal Reserve’s example and nearly forgone buying US Treasury debt.

China was first to opt out and began net selling US Treasuries as of August, 2011 (China in red, chart below). China has continued to run record trade driven dollar surplus but has net recycled none of that into US debt since July, 2011. China had averaged 50% of its trade surplus into Treasury debt from 2000 to July of 2011, but from August 2011 onward China stopped cold.

As China (and more generally the BRICS) ceased buying US Treasury debt, a strange collection of financier nations (the BLICS) suddenly became very interested in US Treasury debt. From the debt ceiling debate to the end of QE, these nations were suddenly very excited to add $700 billion in near record low yielding US debt while China net sold.

The chart below shows total debt issued during periods, from 1950 to present, and who accumulated the increase in outstanding Treasurys.

The Federal Reserve plus foreigners represented nearly 2/3rds of all demand from ’08 through ’14. However, since the end of QE, and that 2/3rds of demand gone…rates continue near generational lows??? Who is buying Treasury debt? According to the US Treasury, since QE ended, it is record domestic demand that is maintaining the Treasury bid. The same domestic public buying stocks at record highs and buying housing at record highs.

Looking at who owns America’s debt 2007 through 2016, the chart below highlights the four groups that hold nearly 90% of the debt:

The combined Federal Reserve/Government Accounting Series

Foreigners

Domestic Mutual Funds

And the massive rise in Treasury holdings by domestic “Other Investors” who are not domestic insurance companies, not local or state governments, not depository institutions, not pensions, not mutual funds, nor US Saving bonds.

Treasury buying by foreigners and the Federal Reserve has collapsed since QE ended (chart below). However, the odd surge of domestic “other investors”, Intra-Governmental GAS, and domestic mutual funds have nearly been the sole buyer preventing the US from suffering a very painful surge in interest payments on the record quantity of US Treasury debt.

No, this is nothing like WWII or any previous “crisis”. While America has appointed itself “global policeman” and militarily outspends the rest of the world combined, America is not at war. Simply put, what we are looking at appears little different than the Madoff style Ponzi…but this time it is a state sponsored financial fraud magnitudes larger.

The Federal Reserve and its systematic declining interest rates to perpetuate unrealistically high rates of growth in the face of rapidly decelerating population growth have fouled the American political system, its democracy, and promoted the system that has now bankrupted the nation. And it appears that the Federal Reserve is now directing a state level fraud and farce. If it isn’t time to reconsider the Fed’s role and continued existence now, then when?

The federal government has piled up debt since the latest budget deal was signed into law, tacking $462 billion onto the national credit card since Nov. 2 as the Treasury Department replenished its funds and began another round of borrowing to take it all the way into 2017.

A staggering $339 billion in total debt was added on just the first day after President Obama signed the budget agreement — the single largest hike in history.

The debt has continued to rise, albeit more slowly, in the days since, putting the president on track to come close to the $20 trillion mark by the time he leaves office in January 2017.

Meanwhile, the early deficit numbers for fiscal year 2016, which began Oct. 1, are already looking more grim.

The government ran a deficit of $136 billion last month, up 12 percent compared with the previous October, as spending ballooned and taxes remained nearly flat. It was the worst October since 2010, when the government was still spending on the stimulus and was on pace for a deficit of more than $1 trillion that year.

The Treasury Department did not respond to a request for comment on the debt spike, but analysts said it wasn’t unexpected.

“It’s not going to keep rising at that pace. It’s like putting a cap on a geyser. It was being held at an artificially low pace,” said Robert L. Bixby, executive director of the Concord Coalition, which pushes for policymakers to control debt and deficits. “It’ll increase at a more traditional level from this point on.”

Despite the massive spread of red ink, the government has been getting away with small debt service payments because of historically low interest rates over the past several years.

But as rates rise, so will those payments — from about $220 billion a year now to $755 billion a year in a decade.

The size of the debt has begun to take a starring role in the 2016 presidential campaigns. In the Republican debate Tuesday, Fox Business Network prodded candidates on their plans.

“As we go further and further into debt, we become less and less safe. This is the most important thing we’re going to talk about tonight,” Mr. Paul said. “Can you be for unlimited military spending, and say, ‘Oh, I’m going to make the country safe?’ No, we need a safe country, but, you know, we spend more on our military than the next 10 countries combined.”

Mr. Rubio said defense comes first.

“We can’t even have an economy if we’re not safe,” he said.

Ohio Gov. John Kasich, who as chairman of the House Budget Committee in the late 1990s helped write the deals that produced four years of surpluses, said he has plans to do it again — including a freeze on non-defense discretionary spending.

But it was just such a freeze that Congress rejected this year, forcing the budget deal that allowed for unlimited borrowing for another 16 months.

Mr. Bixby said Congress should use those months to work on long-term fixes rather than preparing for another knock-down fight over the debt limit.

“The way to keep the debt from going up is to change the policies producing the debt,” he said.

The government began bumping up against the debt limit in March and was borrowing from other funds — using “extraordinary measures” — to keep from breaching the $18.1 trillion level. Treasury Secretary Jacob Lew was able to stretch that borrowing through the end of October, when Congress passed a debt holiday lasting into March 2017, allowing him to borrow as much as needed to keep the federal government operating.

The first move was to replenish all of the funds depleted under the “extraordinary measures,” which is what sent debt skyrocketing on Nov. 2.

Such spikes are normal. In 2013, when a debt deal was reached, the government added $328 billion to its borrowing in one day. After the August 2011 debt deal, the amount rose $238 billion in one day.

But the Nov. 2 spike topped them all, at $339 billion in one day.

Of that, about $199 billion is public debt, which is money borrowed from outside sources, and $140 billion is borrowing from within government accounts.

As of Monday, the gross total debt stood at $18.6 trillion, with $13.4 trillion of that public debt borrowed from the outside.

When Mr. Obama took office in 2009, total debt stood at $10.6 trillion.

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What Is Easy Money?

Easy Money is a monetary policy that increases the money supply, usually by lowering interest rates. It occurs when a country’s central bank decides to allow new cash flows into the banking system. Since interest rates are lower, it is easier for banks and lenders to loan money, thus leading to increased economic growth.

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